economics and online work (a slightly misleading title though - see description)

Economics & Online WorkJohn Horton

Stern School of BusinessNew York University

Training School on Virtual WorkUniversity of Malta

Sep 19th, 2013

Sunday, September 22, 13

Agenda

• Economists for other social scientists

• Labor Economics - some basic principles


My background

• Did not get a PhD in Economics

• But my advisers were all economists

• Main collaborators have been computer scientists

• I have also worked with psychologists, sociologists and legal scholars

• This background has some advantages for this kind of talk


Goals

• Provide a non-strawman version of economic thinking

• Explain some quirks of economics that other social scientists might find confusing

• Convince you that you would find it useful to wrestle with---even if you do not agree with---economic arguments


Critiques of economics• Implausible assumptions

• Abundant evidence that humans are not “rational”

• Too mathematical

• Economists have “physics envy”

• Economic imperialism

• Rational addition? Voluntary unemployment? Household production functions? Seriously?


Economic schools

• Classical (Smith, Ricardo, Malthus, JS Mill)

• Austrian

• Heterodox (e.g., Marxist, Feminist, Institutional)

• Neo-Classical (Alfred Marshall, nearly everyone)

“Mainstream”


Unique characteristics of mainstream economists• Methodological individualism

• Focus on formal mathematical modeling using the “methodology of positive economics”

• All models share common features

• Restrictive views on what’s “evidence”

• Increasingly thinking of itself as an experimental science

• “Deeds, not words”


Methodological individualism

• Societal phenomena must be explained by the behaviors of individuals making choices and interacting with other individuals

• Does not mean everyone uses their own method (this is what I thought)

• Surprisingly restrictive - rules out many of the constructs central to other social sciences (e.g., class)


Methodology of positive economics

• The methodology is basically one that gives modelers license to make “unrealistic” assumptions if predictions are good

• Judge models by their explanatory power, not their assumptions


Billiards player plays as if he knows physics and geometry

But he’s not actually calculating precise angles, considering coefficient of rolling friction and so on.






• Economic “imperialism”

• Rational addition? Voluntary unemployment? Seriously?

Response: It’s often useful to assume they are.


Economic models

• Define “agents” - people, firms, governments

• Give them preferences

• Define their choice sets

• Solve the model

• Generate comparative statics - “if X goes up, then in equilibrium, Y goes...”


Model complexity

• Simple models are a reaction to---not a flight from---the complexity of the social word

• Most would view models as analogous to frictionless planes in physics

• A idealized starting point for analysis


The Economist’s “frictionless plane”

• Perfect property rights

• All information is common knowledge and free

• No search costs & no transaction costs

• Homogeneous workers & firms with well-defined preferences

• Free entry of workers & firms


Bulk of research is dealing with “friction”• Imperfect property rights

• Costly transactions

• Search costs

• Information asymmetries

• Moral Hazard

• Adverse selection

• Bounded rationality


Mathematical economics: Physics envy?

• In defense of mathematical economics:

• Math forces researchers to be clear about their assumptions

• Quantification helps formulate testable hypotheses; discuss relative importance of various theoretical possibilities

• Many written theories sound plausible but are logically inconsistent or are pseudo-theories

• Exercise: Read Wikipedia article on Aristotelian physics & be amazed at (a) how plausible it all seams and yet (b) how wrong it is.








Response: Simple models are at least transparently wrong.


Economic “imperialism”


Invaded “territories”• Examples (Gary Becker is best example):

• Economics of crime

• Economics of the family

• Economics of addiction

• Aren’t these better addressed via:

• Criminology

• Social psychology

• Medicine


Why imperialism “works”

• Economics has some simple ideas that are (a) powerful, widely applicable and (b) often overlooked by other disciplines:

• Financial incentives matter

• Opportunity costs matter

• Rational decision-makers think on the margin

• Equilibrium outcomes are not always intuitive

• Economics often has useful focus on causality








Response: Agreed. But it seems like an opportunity.


Empiricism


What’s compelling evidence

• Very little stock put into qualitative evidence

• Narrow views on quantitative evidence:

• Short of randomized experiment, most economists are highly skeptical of causal claims

• Less concerned with “representative” samples than other social sciences


“Deeds, not words”: Economics and self-reports

• Much of economics deals with situations where people are unwilling to reveal true preferences

• Empirical focus is on what they do, rather than what they say


Homer: Is this car $15,000?Salesman: [rubs off the $12,000 price tag] It is now.!


My View: This gets taken much too far• Example: “Moving to Opportunity”

Experiment

• “These people aren’t fish Jeff; you can just ask them.”

• Structured interviewing identified important mental health effects

• Great arbitrage/collaboration opportunity for other social scientists


Primacy of revealed preference rather than stated preference• “Revealed” as opposed to “stated”

• Example:

• “MTurk worker works for pennies/hour - tells researcher he hates it.”

• Economist:

• “Pennies/hour is apparently better than his next best option - good thing MTurk exists.”


Labor Economics


Why a “labor” economics?• Labor markets are funny in many ways

• Both workers and vacancies are often idiosyncratic

• Matches take time to form and evolve

• Labor is the only “input” that cares about its “price”

• Labor has to decide about developing its own human capital

• Labor markets obviously do not instantly clear

• Wages are “sticky”

• Search is very costly

• Much of public policy directly related to questions about functioning of labor markets


Some classic questions in labor economics

• What are the determinants of labor supply and demand?

• What explains wages?

• How does X affect wages? (X = education, gender, race, age, tenure etc.)

• Why is there unemployment?

• What can public policy do to improve labor markets?


Why employees? • Why not just atomic single-person “firms” trading in a

market?

• Markets have transaction costs

• Avoids “hold-up” problems

• There are advantages to employees

• Coase identified technology as key driver, but theoretically ambiguous

• Makes internal control easier; also makes spot market easier


Economists and labor• First approximation (full information, market competition):

• Wages “set” by supply and demand - both sides “price takers”

• Market wages reflect compensating differentials

• Workers “pay” for amenities; must be paid for disamenities (e.g., unpleasant work conditions)

• Elaborations:

• Efficiency wages (productivity and wages related)

• Bargaining power


Basic S&D framework

Hours Worked

Wag

e

Supply

Demand

Labor's Surplus

Firm's Surplus

Firm Surplus: Firm gets hours of work at a price below what they would have paid.Labor Surplus: Worker gets a wage above what they would have had to have been paid.

Demand 2


Micro-foundations• Labor supply curve

• Aggregates up the choices of all workers

• Trade-off between work and next best alternative (catch-all “leisure”)

• Labor demand curve

• Aggregates up demand of all identical firms

• Trade-off between hiring worker and not hiring the marginal worker


Individual labor supply

Hours Worked

Wag

e

May Bend Backwards

Reservation Wage

Reservation Wage 2 (for better job)

Individual Labor Supply


Indifference curves & LS

Hours Worked

Hou

rs o

f Le

isur

e

(MU Income) * Wage = MU Leisure -(MU Hours) * Wage = MU Leisure

Wages are high.

Wages are low. The income from an hour of work is worth very little leisure.

The income from an hour of work is worth a great deal of foregone leisure.


Comments on labor supply

• Given relatively little flexibility to set own hours, reservation wage is often key parameter

• Social policies are often indexed to labor supply, which can be problematic


Labor demand

Employees Added

$'s

of

Wid

gets

Pro

duc

ed

L L + 1

Worker's marginal product (MP)

Firm: Is MP > MC?

Worker's marginal cost (MC)

Yes - Add more workersNo - Don't hire anyone else

Wag

e

Key Assumption: Firms are price-takers.

Concave: Decreasing returns to labor (and all factors)


Comments on labor demand

• This argument explains why economists care so much about labor productivity

• Directly related to wages & wealth of society

• Note that firms pays a worker marginal product, but gets to keep average product (which is higher).

• A competitive market will reduce firm’s profits to zero


Monopsony & minimum wages

Hours Worked

Wag

e

Supply

Demand

Deadweight Loss

Transferred to the worker with MW

Transferred to the monopsonist firm

Minium Wage

Monopsonist Wage

Up for grabs

Firms's Surplus

Worker's Surplus


Efficiency wages

Wage

Prod

uctiv

ity

Assumption in the simple models - no relationship

More motivatedLess turn-overLess need to monitorHealthier

High turn-overStealingLow motivation

"Efficiency wage" models


Technological change & LD

Employees within Firm

$ of

Goo

ds s

old

by F

irm

Technological change can have ambiguous effects on demand for labor

Old Technology

New Technology 1

New Technology 2E.g., Agriculture, Manufacturing

E.g., computer programmers


Example from my own work: Starting with the

Frictionless Plane


“Labor Economics of Paid Crowdsourcing”

• Joint with Lydia Chilton

• Theory: Workers work until marginal benefit equals marginal cost.

• Experiment: Give workers piece-rate task, then lower payment until they quit---learn their reservation wage.

• Why we care: Reservation wage is a key parameter in labor markets. Also, way to test model of labor supply.


23

57

810

1112

1315

1617

181920

2122

2325

2627

2829

0 20 40 60Worker Output

coun

t

Divisible by 5?

FALSETRUE

Results

• Workers work more when wages are high, less when low (+1 for economics)

• Reservation wage calculation not crazy: $1.40/hour

• Workers exhibit strong preference for earning amounts evenly divisibly by 5 (-1 for economics)


Behavioral economics?• Uses same tools as economics but:

• Much more interested in how people actually behave as measured by controlled experimentation

• People violate homo economicus assumptions in predictable ways

• Research program seems to take behavioral insights and incorporate them into models

• My own view:

• Very situation dependent - at oDesk, I’ve found a price theory approach more useful - “mistakes” get disciplined out


John [email protected]

@johnjhorton


mailto:[email protected]

mailto:[email protected]